How to find the right credit card for you
When times are tough or you have a vital purchase to make, it's all too tempting to whack all your expenses straight onto plastic. But often, we forget about the finer details, such as when we’ll pay it back and how much it will cost us, and don’t worry about it until the statement comes in.
The problem is, is that such lazy financial habits can hit the pocket hard, so it’s worth making sure that you’re using the right credit card for your circumstances.
Research from price comparison website uSwitch shows that providers are squeezing extra juice from their customers with 44 credit cards – that’s 30% of the market – cutting their interest-free period for new customers from 56 days to 50 days. Balance transfer fees and the cost for withdrawing cash have gone up, and there are fewer 0% purchase cards available.
None of this should deter you from looking for a better deal though. Not only are credit cards a great way of spreading your costs at expensive times of the year, but they are also a safe and convenient way to pay for goods over the internet or phone.
Under section 75 of the 1974 Consumer Credit Act, cardholders are protected for all purchases over £100 (but less than £30,000) if the goods or services they buy are faulty or the company goes bust. “Credit cards have a role to play, but only if used sensibly,” says Martyn Saville, senior researcher at Which?.
While the credit crunch has certainly hit lending, the crisis hasn’t had such a marked effect on credit cards as it has had on mortgages. So it’s still reasonably easy to find a card that can save you money on your forthcoming spending or prevent your existing credit card debts from snowballing further.
The right card for you
The first thing you need to work out is what kind of credit card will suit your situation best – and bear in mind that you may well need more than one card in your wallet.
If you have a credit card balance that is racking up because you can’t afford to pay it off straightaway, your best bet will be 0% balance transfer cards. These give you the freedom to clear your balance without interest charges increasing it further.
Pay off as much as you can afford each month or divide the debt into equal monthly payments to ensure that by the time the 0% offer expires – typically after 12 to 15 months – the balance has been repaid. If you can’t afford to do that then put a note in the diary stating when the 0% offer ends and then look for another to transfer it over to in plenty of time.
Sean Gardner, director of MoneyExpert.com, believes competitors to the cards at the top of the best-buy tables will try and come up with added incentives to try and entice customers to their products. For example, several credit card providers have used interest-free periods of 16 months to beat their competitors to the top.
“But what’s far more likely is for cards to start offering other incentives such as lower fees or cashback options,” Gardner adds.
Balance transfer fees are typically around the 2.5% to 3% mark and most cards charge them now: 91% of cards today compared with just 29% in 2005.
The larger your debt, the more attention you need to pay to balance transfer fees. However, don’t be swayed by lower fees if the balance-transfer period is short – say six months – unless you’re positive you can pay off the debt in that time.
Spend, spend, spend
Although these cards are designed for paying off debts, there’s nothing to stop you spending on them. Indeed, this is where the card issuer really stands to make money, so you need to check your terms and conditions closely if you plan to hit the shops with a balance transfer card as new-purchase terms may not be so competitive.
Some cards do offer 0% on balance transfers and new purchases. However, not all are quite so good.
“Quite a lot of providers offer 10 to 12-month 0% balance transfer deals plus three months 0% purchase, but I still don’t think they’re worth it because of their repayment hierarchy,” warns David Black, Defaqto’s principal
consultant on banking.
Most credit cards employ what is known as a negative repayment hierarchy – a sneaky little trick that costs you money. The chances are your card will charge you three different rates for the three different uses for your card: repaying balance transfers, making a new purchase and withdrawing money.
With a negative repayment hierarchy your monthly repayments go towards paying those debts with the lower rates, allowing those with higher rates to carry on growing.
Martyn Saville explains: “If you transfer a balance of £2,000 at 0% and then spend another £1,000 at your purchases APR of 16.9%, every penny you pay in repayments could be allocated against the 0% deal – the purchases continue to attract interest at 16.9% until the 0% balance is paid off in full.”
Nationwide Building Society and Saga credit cards are two notable exceptions that use a positive payment hierarchy, meaning your most expensive debts are paid off first.
For those who need a card to shop with as well, it’s therefore usually best to get a card designed for spending.
Most cards offer interest-free periods of between 50 and 59 days, but again if you aren’t convinced you’ll be able to pay the bill off every month, a 0% card makes sense to ensure you don’t pay interest on the balance.
As with balance transfer introductory periods, the key is to regard your credit card as a temporary aid rather than means to get extra cash to play with. Forget about how low the APR is once the 0% period runs out, look for the card with the longest period and make the maximum payments possible in that time to clear the debt.
Alternatively, if the Caribbean cruise you splashed out on will take longer to pay off, make sure you take a note of when the 0% introductory offer ends, and be sure to look for a 0% balance transfer card to switch the debt to.
For many people, a credit card is simply used for convenience rather than as a form of borrowing. Research from Sainsbury’s shows that there are approximately 7.55 million Brits who use their credit card like a debit card or cash, paying for everyday items and clearing their balance every month. If you fall into this category, it’s not worth looking at interest rates as you shouldn’t be paying any. Instead, look for a card that offers cashback or other rewards.
Whichever type you choose, make sure it matches your own spending habits. London-based commuters may be drawn to the Barclaycard One Pulse Special, which gives cashback on Transport for London, while those who use their card to fill up the family car would get 3% back on Shell fuel with the Shell Mastercard.
In the same way, don’t pick a reward card because it gives a lot of points if you won’t use them – it’s no use getting a Lloyds TSB Airmiles Duo Amex, when you’ve got a fear of flying.
Sainsbury’s research reveals that many cardholders don’t make use of their collected points: around 8.9 million people have collected rewards linked to their credit cards in the last year but only three million have bothered to claim them. The main reason for not bothering was that the financial reward was deemed too small.
However, you can boost your points or amount of cashback by putting bills onto your credit card too – as long as you are able to clear the balance in full before the end of the month. Survey results from American Express show that just 3% of respondents pay their household bills by credit card, preferring to use direct debit, cheques or debit cards instead.
Chopping and changing credit cards doesn’t suit everyone as it requires you to be organised and disciplined. If you are, the best option is a ‘plain vanilla’ card that has a low standard rate. The average APR is now 17.7%, according to uSwitch figures, but if you look specifically for a low-rate credit card then you can find APRs below 10%.
This kind of card isn’t an excuse to put your feet up though: be aware that rates can change and cash withdrawal rates will be significantly higher, with minimum charges and fees applying. Alternatively, if you have debts that might take a while to repay but you don’t trust yourself to do the research, Saville suggests getting a low-rate card. “If you don’t want to keep switching, a low-rate life-of-balance card may be your best option. The APR stays the same until the balance is paid off in full,” he says.
Consumers are increasingly taking their plastic friend on holiday with them, but while you may want to switch off, card-wise you still need to keep your wits about you. Paying for goods with your credit card often gives you a better exchange rate, but be aware that you will usually be charged a foreign usage charge of up to 3% for every transaction or purchase. However, some card issuers offer cards that don’t charge this fee.
Typical APR versus real APR
Once you’ve worked out which kind of credit card (or cards) suits you best there are a few other pitfalls to navigate. First of all, check what average percentage repayment (APR) you are actually being charged – the starred APR rate is the ‘typical’ rate you’ll get, the actual rate you pay could be subject to a credit score.
“You’re only really going to find out your APR when you apply, and an awful lot of people are going to apply if it’s a good rate,” says David Black.
Your credit status affects what rate you receive, and although current rules dictate that two out of three borrowers must receive the typical APR, this only applies to approved borrowers. “Let’s put it in simple maths here: if 12 people apply and the credit card company declines nine of them – two out of three people will still get the best rate,” Black explains.
Final things to watch out for
While credit cards may well be your flexible friend you should never stretch this flexibility to the limit and use them to take money out of the hole in the wall. This can work out expensive, even with those cards offering the lowest rates on cash withdrawals. Not only are rates typically higher than new purchase rates (often as much as 30%) but there’s usually a minimum cash advance fee of £2.86 and no interest-free period, so interest starts accruing as soon as the money is in your hand. If you’re strapped for cash, speak to your bank about an overdraft instead.
Hopefully, the credit crunch has shaken up people’s attitudes towards borrowing and spending enough to stop consumers viewing credit cards as an easy–access solution to money woes. However, that doesn’t mean getting a credit card should be a complete no-no, especially at such an expensive time of year. Take advantage of the 0% periods, cashback and rewards but don’t give away money to your card issuer unnecessarily by falling into their various money traps.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.